GCC bank lending to pick up in Q4 2010

Economists believe that banks will be selective

By

Nadim Kawach

PublishedMonday, September 20, 2010

Analysts say there has been a slight pick-up in lending in the Gulf, mainly in oil giant Saudi Arabia (FILE)

Banks in Gulf oil producers appear to be gradually returning to their senses and loosening the noose on their lending operations that have been hit by the 2008 global fiscal distress and regional default problems, analysts said.

Domestic credit in the six-nation Gulf Cooperation Council (GCC), which pumps nearly 17 per cent of the world's oil supplies, has been dormant over the past two years but is starting to trickle up as the economic fog begins to dissipate and the banks amass sufficient reserves as a buffer for their financial exposures.

Although there has been a slight pick up in lending, mainly in oil giant Saudi Arabia, credit growth is still way behind that in peak years of 2007 and 2008.

Economists believe that more than 150 banks in the 29-year-old Gulf alliance will begin the trip towards normal lending later this year but expected them to be selective and target individuals and other less risky borrowers.

"There has already been a slight pickup in lending by banks in many countries in the region and the pace of lending growth is set to rise over the remainder of this year and 2011," said Paul Gamble, Head of Research at the Riyadh-based Jadwa Investment, one of the largest Saudi private financial consulting firms.

"Banks have refined their lending policies and have become more comfortable with their own financial exposures... they also find their financial performance has been affected by the lack of lending activity, so they will tend to lend more as the economic environment improves," he told Emirates 24/7.

Gamble said he expected GCC banks, which control more than half the total Arab bank assets, to target borrowers with what they consider lowest credit risk.

"Some leading companies, notably those with government ownership, are hitting single obligor limits that are preventing the banks from lending more," he said.

"Banks are therefore likely to target companies with high transparency and salary-backed loans to local individuals with little existing debt. Despite the anticipated improvement, lending growth will be well below the pace it was in the few years up to the middle of 2008."

Credits by GCC banks have so far this year recorded slight growth to extend nearly 15 months of crippled lending activity because of the global crisis and exposure by many banks to regional default problems.
What complicates the problem is that banks appear to be still unwilling to give long-term loans while domestic demand has remained stagnant as many companies are disheartened by global uncertainty. Lending to the less risky public sector has also remained weak as government coffers have been replenished by the recent improvement in oil prices.

"Total credit for the region will increase this year versus last year which froze completely.....we would see a pick up in bank lending in the GCC in the second half of 2010 but it would remain below what we saw prior to 2009," said John Sfakianakis, chief economist at Banque Saudi Fransi (BSF).

"But we can't generalize as to the causes of lackluster lending in the region. In the UAE, banks over-relied on the property sector and that sector is now in the negative list as it continues its downward trend.....the UAE will have to rediscover those sectors that have sustainable growth and for its private sector to generate demand away from real estate, that is not easy and it will take time."

In recent comments, Moody's Investment Service said GCC banks are slowly recovering from the repercussions of the crisis and regional defaults but expected a full recovery in 2011. It urged banks to continue building up their loan loss provisions to strengthen their position and reassure investors.

Analysts said Gulf banks have sufficient liquidity to resume normal lending following a pick in deposits these institutions over the past few months.

Official data showed deposits with the UAE's 51 banks swelled by nearly Dh30 billion in the first seven months of 2010 to reach around Dh998 billion at the end of July, one of their highest ever levels. But credit grew at a slower pace, rising by about Dh10 billion to Dh1,025 billion in the same period.

In Saudi Arabia, which has the second largest Arab banking sector after the UAE, deposits plunged from Dh942 billion at the end of 2009 to Dh917 billion at the end of January 2010 but they rebounded to Dh942 billion at the end of July this year, nearly Dh17 billion over their level in July last year.

Deposits with Oman's banks grew year-on-year by 11.6 per cent to RO9.85 billion at the end of July while in Qatar they gained about QR12 billion to peak at nearly QR246 billion at the end of May.

Deposits with Bahrain's retail banks climbed to a record high of around BD10.13 billion at the end of June from BD9.52 billion at the end of 2009.

Kuwait was an exception as deposits with its banks shrank to around KD27.9 billion at the end of July from KD28.1 billion at the end of 2009.

Slow lending activity had its toll on the GCC banks' performance, with their net earnings dipping by around 8.5 per cent to nearly $14.39 billion in 2009 from about $15.74 billion in 2008, according to their balance sheets.

Bahrain, the largest offshore banking centre in the Middle East, suffered from the biggest fall of around 35.2 per cent. In contrast, Kuwait's banks recorded one of their largest increases in net income of around 70 per cent.

The combined net profits of UAE banks receded by around 19.18 per cent while there was a drop of 15.2 per cent in Oman, and 10.14 per cent in Saudi Arabia. Banks in Qatar reported a slight fall of just 0.1 per cent.

As for the first half of 2010, the net income of 12 UAE banks listed on the bourse grew by nearly 2.2 per cent to Dh8.2 billion despite large losses suffered by the government-controlled Abu Dhabi Commercial Bank, one of the largest banks.

Several banks reported lower earnings in the UAE but the decline was offset by a sharp rise in profits by key banks, including First Gulf Bank, the National Bank of Abu Dhabi, Union National Bank and Mashreq Bank.
In Qatar, banks reported a 17 per cent growth in their net income to around QR3.04 billion (Dhthree billion) in the first half of 2010. Their NPL provisions dipped to around QR32 million from QR92 million in the first quarter.

In contrast, banks in Oman recorded a decline of about 5.9 per cent in their net profits to around RO121.3 million (Dh1.16 billion) in the first half of 2010 from nearly RO129 million (Dh1.23 billion) in the first half of 2009.

"The GCC banking sector has shown considerable resilience in the face of the global financial crisis. Nonetheless, lending activity has stalled sharply from the oil-fueled boom of 2004-2008 when bank credit nearly tripled thanks to an annual growth of around 29.5 per cent," NCB Capital said in a recent study.

"The reversal was amplified by diminished international capital inflows and a drop in the oil export earnings that had underpinned the favorable liquidity situation during the boom....GCC banks' loan books grew by a meager 3.6 per cent in 2009 and a slump in the real estate market forced many banks to set aside higher provisions for bad loans."